Optimal static pricing for a tree network

Abstract

We study the static pricing problem for a network service provider in a loss system with a tree structure. In the network, multiple classes share a common inbound link and then have dedicated outbound links. The motivation is from a company that sells phone cards and needs to price calls to different destinations. We characterize the optimal static prices in order to maximize the steady-state revenue. We report new structural findings as well as alternative proofs for some known results. We compare the optimal static prices versus prices that are asymptotically optimal, and through a set of illustrative numerical examples we show that in certain cases the loss in revenue can be significant. Finally, we show that static prices obtained using the reduced load approximation of the blocking probabilities can be easily obtained and have near-optimal performance, which makes them more attractive for applications.Massachusetts Institute of Technology. Center for Digital BusinessUnited States. Office of Naval Research (Contract N00014-95-1-0232)United States. Office of Naval Research (Contract N00014-01-1-0146)National Science Foundation (U.S.) (Contract DMI-9732795)National Science Foundation (U.S.) (Contract DMI-0085683)National Science Foundation (U.S.) (Contract DMI-0245352